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What Does Roche's Inovio Deal Mean for Investors?

Inovio is not for the short-sighted.

Especially in the health care sector, a company's technology can matter much more than most other aspects of its business. Inovio(NASDAQ:INO) is a case in point. For the last two months or longer, some have questioned the stock, while many longs have looked for a windfall without focusing on what Inovio is all about from a purely health care perspective.

Then yesterday, Roche(NASDAQOTH:RHHBY) went ahead and signed a deal that added a new twist to the story.

In the deal, Roche has agreed to pay $10 million up front and milestones of more than $400 million plus double-digit royalties for two of Inovio's vaccines and the technology used to administer them. These vaccines, one for prostate cancer and the other for hepatitis B, are still in pre-clinical development, but shares are up since the start of the month. Therefore, it is very important for investors to really figure out what health care research Inovio is doing.

What cancer immunotherapy is all aboutThe human immune system has a natural ability to fight foreign bodies. The so-called white knights doing most of the fighting at a cellular level are white blood cells known as T-cells. Cancerous cells manage to dupe these T-cells into "thinking" that they are not the enemy. So, the natural killing abilities of T-cells are suppressed, letting cancer cells grow and destroy the body.

Chemotherapy is an external means of killing cancer cells. It is not an intelligent method -- it kills indiscriminately. Recent research has therefore focused on developing the body's own immune system to fight against cancer, mostly by enhancing, activating, and increasing the number of T-cells in the body.

Inovio's prostate cancer pipeline product INO-5150 has been shown to markedly improve T-cell response in animal studies, and it is expected that once it gets into clinical trial, similar robust T-cell response should be found in human studies as well. This is very, very important for the future of cancer research, which is where Roche's interest is coming from.

The hepatitis-B vaccineThe hepatitis-B virus, or HBV, apart from causing potentially life threatening hepatitis B infection, also attacks the liver and may also progress into cirrhosis of the liver and liver cancer. There is no specific treatment, and HBV vaccine that produces protective antibody levels is the mainstay of prevention. INO-1800, Inovio's candidate for a hepatitis-B vaccine, demonstrated that it not only produces antibody responses but could also kill targeted liver cells in mice by inducing strong T-cell response.

It's not difficult to see the reason behind Roche's interest. This is the first study that has shown that a vaccine administered through an intramuscular injection can produce killer T-cells that can migrate to the liver and kill cancer cells without causing liver damage.

Market potentialProstate cancer is the most common non-skin cancer in men. In 2008, it accounted for 14% of all cancers in men worldwide. According to the American Cancer Society, about one in six men is diagnosed with prostate cancer, and after lung cancer, accounts for the most cancer deaths in men. As per an ACS estimate, more than 230,000 American men will be diagnosed with prostate cancer in 2013. BCC Research estimated the global market for prostate cancer treatments, excluding surgical and radiation therapies, to grow at a compounded annual rate of 18% and reach 18.6 billion by 2017.

Hepatitis B, according to the World Health Organization, has a greater global importance than any other virus. More than 2 billion have been infected with HBV, and 350 million out of them are still chronically infected. Nearly 4 million are infected every year. The global hepatitis-B vaccine market is estimated to grow at a compounded annual growth rate, or CAGR, of 4.1% to roughly $1.4 million by 2018.

ConclusionWhile the Roche partnership provides Inovio with much needed cash for taking its immunotherapy products to clinical stage, according to President and CEO J. Joseph Kim, it also allows the company to move ahead on VGX-3100, its experimental therapeutic vaccine for treating cancers caused by the human papillomavirus, or HPV.

Inovio's INO-5150 is unique in the sense that it is immunotherapeutic and focuses on eliciting an immune response to boost the body's inherent capacity to fight disease. This approach, unlike traditional treatments such as chemotherapy and radiation therapy, does not carry the risk of killing healthy tissue along with cancer-causing cells. This is the purely health care perspective that lies at the core of every investment grade health care stock.